Could the Oil Bust Last?

Yves here. A few weeks ago, conventional wisdom was that oil prices might sink lower, but once excess supply was removed from the market, prices would return to the $80 to $100 a barrel level. Now that consensus view is starting to crack.

By Nick Cunningham, a Washington DC-based writer on energy and environmental issues. You can follow him on twitter at @nickcunningham1. Originally published at OilPrice

The oil industry has experienced boom and busts before, but the depths to which oil prices have plunged have surprised everyone. Could the oil bust now persist much longer than many think?

It is not just oil that has seen a bust. Over the last decade and a half, the global economy has witnessed a massive commodity boom, with prices rising for all sorts of raw materials, including gold, iron ore, oil, gas, copper, wheat, corn, and more. But the commodity “super-cycle” appears to be over, with vast new supplies having come online in the last few years.

As prices rose through the 2000’s, multinational companies extracting all sorts of commodities planned billion dollar projects. With new mines, new oil and gas fields, and other commodity supplies hitting the market at the same time, a bust has ensued.

“Supply has been outstripping demand not because demand has been particularly weak, but because there was too much supply,” Stephen Briggs, a commodities analyst at BNP Paribas SA, told The Wall Street Journal. “It looks like this won’t change anytime soon.”

The oil bust has captured worldwide attention in a way that crashing coal and copper prices have not. And for now, the bust may here to stay, at least a bit longer than many anticipated.

For example, Goldman Sachs sharply downgraded its assessment for crude oil prices. The investment bank now says that it sees Brent trading at around $42 per barrel over the next few months, down from its previous forecast of $80 per barrel. It also says that WTI will fall to $41, a downward revision of its previous $70-per-barrel prediction.

Many market watchers have predicted a “floor” in prices at each key threshold – $70 per barrel, then $60, then $50. But crude prices have ignored these forecasts, plunging to fresh lows each week over the past few months. Just last week, major hedge fund manager Andrew J. Hall said $40 would be an “absolute price floor,” another threshold that is within striking distance.

Saudi Prince Alwaleed bin Talal threw cold water on the markets even further with his recent comments.

“If supply stays where it is, and demand remains weak, you better believe it is gonna go down more. But if some supply is taken off the market, and there’s some growth in demand, prices may go up. But I’m sure we’re never going to see $100 anymore,” he said in an interview with USA Today..

There are several reasons low prices may persist. First, production is still at elevated levels. OPEC is holding strong to its production levels, despite unease among many of its members. And U.S. shale companies are maintaining output for the time being. That will likely change later this year as hedges expire and companies are forced out of the market, but in the short-term, the U.S. probably won’t see a decline in production.

Also, there is excess storage capacity that is allowing producers to continue to pump. Some companies are even storing oil on unused tankers at sea, betting that they can sell the volumes later at higher prices.

Finally, as oil prices fall, so do the costs of production. The cost of materials, along with the rates drillers pay to rent out rigs, deflate with the price of oil. That makes breakeven cost projections a bit of a moving target.

“To keep all capital sidelined and curtail investment in shale until the market has rebalanced, we believe prices need to stay lower for longer,” Goldman Sachs wrote in their latest report.

Speculators don’t know what to make of the oil markets right now. Some are pouring money into bets on prices rising, while others are wagering that prices have further room to fall.

We will learn more about the state of the U.S. oil and gas industry over the next few weeks as fourth quarter earnings are released. For the energy sector as a whole, profits are expected to fall by 19.1 percent. Some companies will be in worse shape than others, which could give us an indication of where production levels are heading, and with them, how long oil prices will stay low.

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    1. Jef

      6 or 7 years ago I and others on TOD held the belief that oil would hit $40 before it ever hit $200 but that even at $40 less and less people could afford it and I stick to that view.

      1. lakewoebegoner

        “but that even at $40 less and less people could afford it and I stick to that view.”

        America is getting older and driving less, while the young are driving less (for cultural and financial reasons), the idea that China or india are going to have car ownership levels that remotely approach American levels is ludicrous (simply not enough land to plow over for parking lots or disposable income to have a big home and a nice car).

        Income inequality (which is accelerating around the world) kills energy consumption growth. unfortunatly cheap fossil fuels blunts development into alt. energy, while simultaneously fossil fuel demand isn’t blunted enough to affect the climate.

        Ironically if Exxon really cared about its future profits it would want to spread the wealth around.

  1. joecostello

    “Supply has been outstripping demand not because demand has been particularly weak, but because there was too much supply,” Stephen Briggs, a commodities analyst at BNP Paribas SA.

    This is simply not true, from all numbers, and they are guesstimates at best(all oil are numbers are at best problematic), global oil demand basically stagnated last year. There’s no great supply glut, what’s going on is the global economic growth is stagnant. US shale industry and much capex for any new oil elsewhere are in a world of hurt. The era of cheap oil is over and $100 a barrel stops economic growth as we know it – bet on it.

    1. Jef

      Modern industrial civilization was built on and requires at the very least a 10 to 1 margin for the KING of all resources. Much of the wealth, prosperity, and infrastructure of the last 50 years was built on even greater margins especially when you factor in all subsidies.

      Break even is only relevant if the world can function paying 10 times that price, $20 a barrel break even = $200 a barrel. Not going to happen.

      1. Dylan

        I believe he is referring to the cost of operating existing oil production not the holistic cost of drilling new wells, the relevant number over 1-2 years

  2. joecostello

    It doesn’t take $20 to stop the shale industry, no one was making money at a $100. Shale industry is the most recent poster child for the financialization of the economy, we’ll see how this one shakes out. Again, the more important story about what’s happened in the last six months with oil is what its saying about the global economy, but the financial world doesn’t want to ask that because then its not just questions about shale debt, but all the rest of the debt too.

  3. guest

    The cost of materials, along with the rates drillers pay to rent out rigs, deflate with the price of oil.

    Can somebody knowledgeable with the hydrocarbon extraction industry confirm this?

    Are rigs rental fees indexed on the price of oil? Have manufacturers of materials overcapacity and overproduced, and are therefore desperate to sell their supplies to drillers?

    1. Jim Haygood

      It’s not a direct indexation to the price of oil. But there’s a large-scale capacity cycle, as expressed by this National Oilwell Varco observation written back in the good old days of last summer:

      When rig counts were tallied for the census in the early summer of 2014, commodity prices were strong enough to fuel additional drilling momentum. The gap between available and active rigs shrank, and showed an overall strengthening in the U.S. market.

      When the gap narrows to zero, it’s like a shortage of rental cars at LAX: those who can afford it will pay any price. But when the gap grows, rig makers such as NOV will rent them out at cost or even below, to get some cash flow instead of having an idle, depreciating rig that rusts in the rain.

      1. cnchal

        The last three paragraphs are the cherry on top.

        The outlook for 2015 is more of a good news/bad news scenario. Market conditions remain good in North America, especially in the shale plays and other unconventional re-sources. Demand for the best rigs is expanding. Advances in rig technology will continue to improve drilling efficiency, safety, and the environmental impact of drilling.

        Growth in land rigs is expected in Canada, Latin America and the Middle East. The offshore global mobile fleet will continue to add to its numbers with state-of-the art rigs. Furthermore, analysts expect the world’s energy consumption to continue to grow.

        However, combining higher rig efficiency with crude prices that have slumped in recent days, does impact our optimism. It’s possible that in 2015, if supplies are still high, U.S. utilization may fall slightly, since fewer rigs will be necessary for new production. Hopefully, the recent commodity price dip is just an aberration, and this dynamic industry will continue to prosper in innovative ways.

        Talk about putting money into a hole in the ground.

  4. James Levy

    Am I crazy or are numbers more opaque than they used to be? It seems to me that stats that should be easily determinable–like what the average cost of shale oil production is per barrel–have become hopelessly confused and indeterminate these days. Even easy questions like global demand now seem endlessly open to speculation and debate. We may have crossed a threshold where we have more information and data than has ever been produced before, but more of it than ever is lies, propaganda, spin, and willful obfuscation. Note from the other day: this became a chronic problem in the late Roman Empire, where emperors had bigger bureaucracies than ever but could not learn simple things that an Augustus or even a Marcus Aurelius had at his fingertips (also reminds me of the late Soviet Union, where all bad news failed to trickle up to the decision-makers in the Kremlin–telling your superiors happy stories was the path to advancement, not solving problems).

    1. Yves Smith Post author

      The problem is that shale is an even higher fixed cost operation relative to production than conventional oil is.

      Talking about marginal costs (which some are apparently trying to do) is meaningless. And the average costs depend on the period over which you amortize those fixed costs.

  5. MartyH

    For me, the “Killing of the Shale Industry” sounds a bit glib. Given the size of their cash-oceans, you’d think the Saudis and friends would be big investors and exploiters and use that to protect their reserves to be “recovered” in the future as production elsewhere tails off and prices are driven/kept high. They’ve proven to be pretty sharp over the years. And, Bless “Hayek”, they own enough US and UK assets. Could the falling cost of renewables (solar and wind) be finally cutting into petro-demand? Obviously, the slow-roll Depression (our Economists’ “Voldemort” … that which can not be named) contributes to reduced demand as well. Put another way, the Neo-Liberal Capital Order may have finally squeezed the 99.9%’s share of “profits” to the point that we can’t afford as much and it’s showing up early “at the pump?”

  6. dsp

    Saudi Arabia is one of the USAs many corrupt satrapies. A lot gets accomplished at one time with this oil manipulation, from destroying US domestic production, laying waste to mostly red states, to helping destroy Russia to open up central Asia for American imperialism.

  7. Cynthia

    Commodities have taken a hit, but equities are still holding up, at least for now. Though when equities do start to wobble, you can rest assured that the Fed will step in and save the day with yet another round of QE. I don’t think the Fed will do this because they value equities more than do commodities. They’ll do it because investors won’t have any place to put their money, except on the sidelines. And the Fed won’t stand for that.

    1. abynormal

      my eyes are twinkling as banks go desperado…
      from March 2014: CItigroup shares dropped 5.4% Thursday to close at $47.45 a share after the Federal Reserve rejected the plans of Citigroup and four other banks to raise dividend payments and increase stock buybacks. The Fed said their management practices or capital cushions are not robust enough to withstand a severe economic downturn. (cost more to close than open)

      reported Today: In 2014 Citi retail executives went from targeting 120 of “the world’s top 150 cities” to homing in on 100 cities where the company has the greatest scale and potential. As a result, it is withdrawing from Tokyo, Lima, Panama City, and Houston, for example. In the United States, it is now focused on six cities, down from 14.

      1. Paul Niemi

        And there goes copper, breaking loose and plunging again overnight. I have been watching it since last April. With that goes the Chinese shadow banking system and all the hot money the big banks poured into China. Their stock market, going to giddy heights on speculation, will crash, and their credit markets will freeze. A lot of western investors, including big banks, stand to lose enough to go broke.

        It was always about cheap, limitless liquidity, as an unction the big banks applied to commodities and then stocks. In oil, I have been frustrated about the idea the crash is a plot to get Putin. No one really gives a rat’s rear end about Putin. It was about US production up 75 percent, with OPEC up 5 percent, fueled by zero interest money the Fed gave to their primary dealers to use to gamble. The economy didn’t recover, because people have been ripped off of trillions, around the world, by artificially high commodity prices. It was the example mechanism of wealth transfer from the poor to the rich. Now the first big bank to taste dust may be Standard Chartered, but the whole cartel, with Citi and HSBC and the rest are in jeopardy.

        1. Paul Niemi

          Now copper at $263 from $2.76 yesterday evening. More than 5 percent in 12 hours. Must remind myself to fasten seatbelts today.

        2. Paul Niemi

          Now copper down to $2.51. That’s nine percent in 24 hours. It has been falling most overnight, when Asian markets are open. I have predicted it will go to $1.25, about the historical mean. Just in time, as I have some pipes in the basement that need to be replaced this summer.

        3. Roland

          “No one really gives a rat’s rear end about Putin.”

          Yeah, they do actually want to get Putin. Both the USA and the Saudis have strong motives.

          The globalists running the USA and other Western Bloc countries want to punish any government with pretensions to independent action on the world scene. Putin is the standard-bearer for meaningful sovereign statehood in today’s world. Therefore the arch-globalists want to inflict hardship on that country, discredit its leaders, and hopefully cause a change of government without the need for a more intensified conflict.

          The shale boom will be a short-term affair in the USA, but it gives the US gov’t a window of geopolitical opportunity to wage a few years’ worth of economic warfare against any opponents which depend on oil exports. Some extra Fed printing to bail out shale boom speculators is a pretty small price to pay for thwarting what might be Russia’s last effort to play a role in world affairs. The economic war against Russia is an effort to guard against any challenges to the hegemonic power and its reserve currency. It’s an effort to avoid the potential for a more intense future conflict that could really undermine the confidence other parties place in the current US-dominated globalist regime.

          The Saudi regime is heavily engaged in a regional proxy war with Russia and Iran. The Saudi regime can get away with damaging their own country’s long-term interest, depleting a national resource at artificially low prices. They don’t have to keep an electorate happy. The Saudi regime does have to fear a revolution, but they got the USA to back them up. A couple of years of painful economic warfare against Russia and Iran could give the Saudis victory in Syria, Iraq, and Lebanon. Of course, the Western Bloc will then betray the Saudis and pull the rug out from under them, but the current batch of princes don’t seem to understand that yet.

          1. Paul Niemi

            I would point out that Brazil and Italy both have larger gross domestic products than Russia. Its is only one ninth the size of the European Union. Other than gas to Europe and some oil, there is not much people want to or need to buy from Russia, perhaps only guns and grenades for thugs and some lumber. No one would throw global markets into turmoil, potentially losing fortunes and overthrowing governments, to get at one V. Putin, for failure to kowtow. He may be a pest, but he’s not that important.

    2. Jim Haygood

      ‘investors won’t have any place to put their money, except on the sidelines.’

      All financial assets have to be held by someone. If you and I bail out of stocks, some institution that keeps a fixed equity allocation will buy them.

      The only true ‘sidelines’ is the Federal Reserve itself, taking big chunks of Treasuries off the market using thin-air credit to ‘pay’ for them. This amounts to increasing its leverage, which is now 72-to-1 ($4.5 trillion of assets supported on a tiny equity slice of $63 billion).

      Hiking leverage to expand asset bubbles … yeah, that sounds like a sustainable policy! /sarc

  8. KenG

    If oil stays even at $50 or $60, will anyone finance new shale drilling? And if, as reported in this column a few days ago, shale wells production drops off quicker than traditional wells, won’t that start to reduce supply relatively soon? Could the goal of low prices just be to scare away potential financers of new shale projects, even if the price recovers?

  9. EoinW

    $40 oil. What a handy prediction to make after the fact(and 2 months after Automatic Earth made the prediction!). If GS says $40 does that mean we can count on $20 and GS predicting $20 around the time it gets to about $24?

    Just proves the point that the mainstream media are only capable of two things: either lying or being wrong!

  10. cnchal

    . . . Goldman Sachs sharply downgraded its assessment for crude oil prices. The investment bank now says that it sees Brent trading at around $42 per barrel over the next few months, down from its previous forecast of $80 per barrel. It also says that WTI will fall to $41, a downward revision of its previous $70-per-barrel prediction.

    Why anyone would believe anything coming from those criminals is absurd. What good is any of their forecasts for anything when in a few weeks they are cut in half. If oil jumps $10 per barrel, those lying sacks of shit will up their revision to $50 per barrel in a few days and the rest of us should have amnesia about what they said and did yesterday.

    Perhaps Goldman can increase demand for oil by having even more trucks filled with aluminum ingots driving from warehouse to warehouse in Detroit. The auto companies are doing their part with 700+ HP gas guzzlers.

    It is crystal clear that oil at $100 per barrel brought on supply, not just of oil but competing renewable energy.

    If that trend were to continue, eventually the amount of oil consumed would dwindle to a fraction of what is consumed today, rendering all oil reserves redundant. That is the fear of every oilman.

    So, for now oil is on sale. After North Dakota has been pincushioned with thousands of fracked wells, and all that implies.

    1. Nathanael

      “It is crystal clear that oil at $100 per barrel brought on supply, not just of oil but competing renewable energy.

      If that trend were to continue, eventually the amount of oil consumed would dwindle to a fraction of what is consumed today, rendering all oil reserves redundant. That is the fear of every oilman.”

      Also the prediction of the analysts at Deutsche Bank. However, they predicted specifically an oscillating curve: oil prices go high, people switch to alternatives, demand drops, oil prices go low, exploration ends, supply drops, oil prices go high, people switch to alternatives, demand drops…

      …repeat until oil is irrelevant, which will happen in about 10-20 years.

  11. MR Fred

    Why is this a surprise? This is capitalism after all, several years of 80 + USD per barrel oil generated new technology, capital resources and improved efficiencies. Now there are new supplies available with more coming on line every day…all planed years ago based on the higher per barrel bench mark. How long will it take to clear the decks, so to speak, of the excess supply and move prices north again? A major uptick in global economic activity, perhaps a new war in the Middle East or stupid , heavy handed American politics generating OPEC supply cuts.

    With at least a 50% chance of a Republican president in the United States I would say war and stupid heavy handed American politics are pretty good bets.

    1. tiebie66

      “How long will it take to clear the decks, so to speak, of the excess supply and move prices north again?” Forever. MMTers are agitating for governments to ‘spend money into existence’ to prevent a lack of demand from occurring and to avoid unemployment from rising. Thus, the excess supply will continue to the benefit of all.

      1. different clue

        Of all who can afford it. I read or heard somewhere that during the Great Depression some formerly expensive staple cost a dime per unit. But who knew anyone who had a dime?

        I wonder if we face a future where many millions of Americans become too poor to buy gas at 50 cents per gallon?

        1. Nathanael

          Already there. The response is pretty obvious, people are switching off of gasoline when they can (public transportation, bicycles, etc.)

  12. Jim

    “Also, there is excess storage capacity that is allowing producers to continue to pump. Some companies are even storing oil on unused tankers at sea, betting that they can sell the volumes later at higher prices.”

    This is wrong. The future price (on futures markets) of oil is (or was) more expensive than sum of the spot price and current storage costs. This allows a risk-free profit, which is independent of where oil prices may head from here. I.e., those who engage in this trade do not necessarily believe (and are certainly not making a bet) that oil prices will move higher.

  13. susan the other

    Something interesting is going on here. It looks like irrational behavior at its most puzzling. Oh gosh, it’s just crazy capitalism. But consider that we’ve (banksters mostly) have been storing oil in tankers for years in order to wait for their price; that all other commodities are also not being used; that the Saudis bought into shale and sand; that it was the Saudis themselves who leaked the fact that decisions had been made to keep oil in the ground; that in spite of the obvious lost cause of the modern oil industry we funded our wildcatters like it was the gold rush and now the banks are merely saying “oops” (we know they are not that dumb); that a deal is being done to combine Iraqi and Iranian oil; that all producers who are marginal are dead; that the world is in a deep depression and the usual capitalist hype (like auto sales BS) is all over the media causing a serious intellectual disconnect; and etc. If this isn’t the consolidation of and control of the oil industry then it really makes no sense whatsoever. And if it is, then what is the goal? I don’t think this is just frivolous humanity – I think it is serious.

    1. different clue

      I think the goal is to enable members of the Inner Party who will be left with most of what will still be considered to be “money” . . . to buy up distressed people and assets all over the world at mere “mills on the Benjamin”. That is the Plan, Stan.

      1. Nathanael

        Dumb goal. Why do they assume their money will still be good?

        Putin decided to go back to “gunboat diplomacy”, fighting to acquire power, but that seems to be a dead end in a modern industrialized economy; the fighting destroys too much wealth.

        The winners will be those who best deploy the “soft” power of popularity and propaganda. True feudalism: the more people you can get to swear loyalty to you, the more powerful you are.

        The Chinese government has done OK at this, but has been too heavy-handed and will probably get its ass kicked sooner or later (not sure when).

  14. Another Gordon

    The Middle East is looking more unstable by the day so I for one am taking no bets on the oil price one way or the other.

    However, I think disruptive change is coming to the energy business starting in a small way in only around three years or so irrespective of the machinations of bankers or political events.

    The driver is that at research into auto batteries is powering ahead, although naturally those closest to market but not quite there yet, keep their cards close to their chest. What is clear is that the big car makers have been investing heavily ahead of adequate batteries being available and it looks as if the next generation of batteries, due well before the end of this decade will get us close to, though probably not quite over, the tipping point where internal combustion engines are relegated to history for most applications. That tipping point may well come in the early/mid 2020s but even before it does demand for oil will be melting away. Also in the early 2020s we may well see new and much cheaper types of nuclear reactor to produce all the electricity drivers want.

    If it happens anything like that oil is just pollution.

    1. Nathanael

      With exponential growth, solar should basically take over the world energy market sometime around 2025-2030. Again with exponential growth, electric vehicles should replace gas vehicles entirely in roughly the same timeframe (there will be laggards who bought gas vehicles when it was uneconomical, of course).

      Oil will have 50% of the market only a couple of years before that (remember, exponential growth), so the collapse in oil demand will be quite sudden and quite dramatic. I don’t think this price collapse is the final collapse for oil (there’s so many high-cost producers to shake out of the market, and the price should go up again after that happens), but I could be wrong

  15. kevinearick

    Consumer Electronics: Smartphone Bipolar Anxiety

    You are watching populations systematically rape each other, in a trivia game they call economics, hoarding into artificial scarcity, in artificial business cycles anchored by feudal contracts, mass media public education from the womb, drawing bigger and bigger crowds, all seeking a scapegoat, other than themselves, Homeland Security for everyone, fearing change.

    Why do you suppose illegal immigrants and H1B1 visa holders are granted licenses above the law with respect to natural born citizens with no criminal record?

    Your basic components are a two-way open system, a one-way closed system and quantum lash, forming a pendulum, of pendulums. What you see are perceptions of loads, based upon your position and frame of reference. Effectively, you are a resistive switch, a potentiometer, and the critters are replacing themselves as fixed resistors, automating redundancy, attempting to replace you.

    That load of derivatives pulls demand forward and projects the status quo out, to inflate income and assets, to create the perception of increasing return on decreasing risk. Empire legacy gives you a false choice, between a short and an open, compliance and rebellion, cavepeople always at war, and sells you the weapons, in this case a smartphone capital control and spy network, on someone else’s cloud, new ivory tower same as the old.

    G sets up the structure so C pays no taxes, and burdens small business with NP, and, if you look, you will see that all the corporate executive boards are connected, which is why G can only print and pretend to collect taxes. Escape velocity is not falling participation, falling income to the remainder, and increasing income disparity favoring landlord monopoly, with printed rent inflation.

    That’s it, screw the man, trimming Pharma Pot for doctors, inflating rent on property held by doctors, and blame the doctors, expecting something other than Obamacare capital control, prohibition of, by and for juveniles, and then stand in the path of militarized cops, expecting something other than your own blood on the street.

    F produces nothing, but self-serving perception. The pre-occupiers complain about others, hoping to take advantage of your reactivity, bankrupting themselves. In the last iteration, the Nazis got caught being the last herd to lose, in an ever-present race to fascism, trying to contain individual producers with arbitrary debt.

    In this iteration, Greenspan was brought in after the point of no return, Bernanke was the segway, and they dropped it all on Yellen, preparing for another polarity swap. All wars, including the war of the sexes, are empire loads, of bull. Wilma telling Fred how to move rocks and Fred telling Wilma how to have babies is not an economy.

    Feudalism must embed Family Law in common law, because it requires ignorance begetting ignorance chasing ignorance, the assumption of a competition for scarce resources in a closed system, and the resulting police state gives the herd excuses for the simple stupidity of continued participation. An economy depends upon who is and is not having children. Everything else is derivative.

    The ability to see forward is the only external feedback, and empires replace it with the past, more stuff, drugs to fill the void. The critters are caught in event horizons of stuff, of their own choice, hunting down a scapegoat for outcomes, always marching to war. Yellen and Congress are just administering the drugs demanded.

    Labor is not so stupid as to make decisions based upon interest rates, regulation or data coming out of the Bureau. The majority always has a juvenile mentality, regardless of race. Warren Buffet and Bill Gates are guaranteed to win, divine providence, and the majority bets on them to win, with MAD pensions. The point of democracy is the minority.

    Don’t have children and expect the law of gravity to be on your side. The majority is always having children when it shouldn’t and not when it should, based upon popularity. That’s what the artificial business cycle is all about, making Dad, and then Mom, the bad guy, in the empire.

    Government is in the Business of replacing parents at a Loss, and the majority recognize the problemsolution until it’s far too late, Love in Action heroin addicts taking over the food bank, to monopolize grant income. Equality is necessarily a race to the bottom, and labor doesn’t do Fred Flintstone.

    At birth, you are a unique key in search of a unique lock, which a unique key in search of a unique lock, creating a current path to an unseen load. The empire doesn’t penalize curiosity, reward compliance, and employ rebellion to grow itself, getting dumber every day, by accident. It’s a reference voltage.

    Money is a mass simplification, assuming that all dollars are equal, regardless of parties to the contract. Rent inflation has its uses, which the Saudi government is learning and why ISIS exists. Labor doesn’t need oil, or any other empire battery, to power its future.

    That sun is only a stationary motor generator relative to the planets in its circuit. Only stupid assumes that something for nothing is an economy. Let stupid build its tower; even an 800 lb gorilla needs to eat.

  16. Jackrabbit

    I’m surprised that people are not more skeptical about the Bartiromo interview with the Saudi Prince (See my remarks a couple of days ago.)

    In short, an “exclusive with Maria” screams easy questions and messaging. The Prince is basically given a loudspeaker to 1) refute the notion of any conspiracy to bring down prices, and/or to 2) ‘talk his book’. The sooner that capitulation occurs, the better (and that applies to Russia and Iran as well as the oil market).

    Note: A few things that struck me about what the Prince said:

    1) that only 6-months ago, the Saudi’s thought that $100 oil was good for both producers and suppliers
    This is counter to the “just markets” theory: Why would the Saudi’s be talking down the market from $115 to $100 only 6 months ago, then turn gung-ho on market share a couple of months later? Why did no one in the market have any inkling that the price would fall so dramatically? Especially with so much at stake? Especially since some are saying that it is a repeat of 2008-9?

    2) that he didn’t mention the end of QE/ZIRP as causing the price plunge.
    We don’t have much info about the ‘pre-paid credit’ inflation hedges that some say caused the dramatic price swing. However, the market appears to have been more disciplined than pre-GFC when the oil price was reached over $140.

    “Dog that didn’t bark?” If the end of QE/ZIRP was likely to have such a dramatic effect, then wouldn’t SOME market participants be anticipating that beforehand?

    3) that he claimed that the Saudi’s didn’t know how low the price would need to go!!
    The Saudi’s know as much or more about the market and each producer than anyone. Its hard to beleive that they don’t know:

    a) the approximate price that would cut off financing for Shale Oil producers to drill more wells; and that,

    b) current wells will almost certainly be pumped until they are dry (so there is little that can be done – except at GREAT AND UNNECESSARY cost).

    H O P

  17. TG

    Indeed, but the commodity ‘super cycle’ might not apply to food, because the rules are different.

    The earth is a big place, and if you dig enough and pay enough to refine lower-grade ores there are zillions of tons of minerals to be had. But agriculture is limited by fresh water, and that you really can’t make (desalinization takes too much energy for it to be used on large-scale agriculture). You can only produce as much food in a year as falls as rain, that’s it (groundwater can push back the day of reckoning but only so far). Oceans also have a limited capacity to produce food, and we are bumping up against those already. So I would think that food prices would tend to stay high, at least relative to wages.

    1. different clue

      You can only dig and refine as much low quality ore as you have energy to dig and refine it. When the energy
      is too low and the ore too dilute, what do you do then?

  18. dan kloke

    So this scenario of increased production and capacities could produce increased dependency on these supply sources and chains. Sources and chains that are already highly technologized and rely on complex infrastructures and subsidiary sources.

    To me this spells gradual further leveraging and slow but steady “covert” inflation, nothing that would destabilize while it’s happening, but leads to greater interdependence across markets and systems, which means more vulnerability to system-wide/global destabilization when one or a few elements starts to fluctuate more significantly.

  19. Nathanael

    What ar people’s ideas of “a long time”?

    The low prices will last a couple of years, maybe five. But as the famous Deutsche Bank report explains, they’ll go back up to a new high again, and then cycle back down again, and so on until the economy *finally* switches completely off of oil and the price dies forever (goes the way of whale oil).

    This is just a little bit early to be the final end of oil. The prices will stay low just long enough to completely destroy the oil exploration business — wipe out the deep sea guys, the frackers, the oil sands people, the whole lot of them. Cause them to retrain and go into other jobs.

    But even with a global economic slump (which will be here for at least five years), the depletion of existing fields will cause continued supply shrinkage, at which point the price will start crawling back up again.

    The price of oil is capped by the cost of solar + batteries + electric vehicles, which is the primary alternative. It’s hard to say exactly what that cap is, but it’s higher than $50 a barrel. Although it will drop substantially, it probably will continue to be higher than that for several years; so once the oil supply permanently stops expanding, we should see oil prices go back up to that cap.

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